MNI INTERVIEW: Fed On Hold For A While, Rate Direction Unclear

The Federal Reserve will keep interest rates on hold for the foreseeable future because inflation remains elevated and the growth outlook strong despite volatility around U.S. trade policy, leaving the direction of any next rate move unclear, former New York Fed staffer Ethan Heisler told MNI. 

“If you don’t have a move to make, as I learned in chess, then you don’t need to make a move,” said Heisler in an interview, adding that no one knew for how long such a pause could extend. “There are no rules, there haven’t been any rules since covid. Historically, the Fed has never paused for more than 18 months.”

The Fed’s next move on interest rates could just as well be a hike as a cut with underlying momentum in the economy robust, he said. 

Heisler believes economic activity will remain at healthy levels, because the Trump administration is likely to back off from its more draconian tariff proposals, and because the massive post-pandemic fiscal boost to the economy is still percolating. 

“The economy is going to have a default of growth unless you actively sabotage it,” he said. “We have this rocket fuel in the engine, and it does all these really weird things to the economy as it continues to pop around.” (See MNI INTERVIEW: Fed Needs More Hawkish Message-Emmons)

BANKING SYSTEM 

Heisler, a banking analyst by trade and author of The Bank Treasury Newsletter, said the financial system is in good shape despite recent market volatility and nerves about loss of global confidence in the dollar and U.S. Treasuries.  

“It’s a very different industry than the one we had during the financial crisis. It’s not just about capital. It’s not just about liquidity coverage. It's about stress scenario testing,” he said, referring not to official central bank tests but “the stuff institutions themselves have learned about, what are their tail risks, what are their specific tail risks?”

He said the Fed and other central banks have also learned over the years how to create targeted emergency facilities that help put a floor under the possibility of debilitating financial turmoil. 

“I believe that the Fed has learned a lot and created a lot in terms of ways to bring stability when there is instability,” he said, pointing to the creation of the Bank Term Funding Program during the banking disruptions of March 2023, and the creation of a Standing Repo Facility. 

“These different things that they have, they're all designed to do one thing, create calm. And they work because they are useful and very short in their time frame.”

CRYPTO RISK

Something that does keep Heisler up at night is the increasing interconnectedness of a lightly regulated crypto and stablecoin industry and the broader banking system.

“We're not going to have the guardrails of thinking through and having tools about how we can integrate and allow crypto to exist within the conventional system,” he said. “If there's a huge flood of stablecoins and the financial system becomes more exposed than in the last cycle, then I’m very concerned about the stability of the financial system, because that creates a cascading effect that could create a very serious run.”